Heading for financial crisis, the picture is gloomy for the Tate

The two Thameside buildings of Sir Nicholas Serota's empire – Tate Modern to the east, Tate Britain to the west – have become essential stops on the nation's cultural itinerary.

Shows such as this summer's Lucian Freud retrospective and the Matisse/ Picasso exhibition have been both critical and popular successes. And the branding of the institution as the last word in style has been crowned by the launch of a new Tate magazine, produced by Condé Nast, publisher of Vogue and Vanity Fair.

Over all the triumphs presides the unsmiling but largely benign and always powerful presence of Sir Nicholas, who has seen his own profile and that of his organisation, which also includes Tates in Liverpool and St Ives, Cornwall, receive growing acclaim at home and abroad.

Now, suddenly, the dream appears to be over. The Tate is heading for a financial crisis. Its chairman David Verey said yesterday it would be in deficit in two years' time and would have to make £1.5m of cuts. Sir Nicholas added that he had been unable to afford to buy a number of paintings which had now gone abroad.

The Tate is now pleading for an increase on its £27.8m government grant. According to Sir Nicholas, not only was government funding well below what was needed, a poor business climate and the impact on confidence and tourism of the 11 September 2001 attacks were also taking their toll.

Sir Nicholas said the institution had missed out by a huge margin in an auction last November of Joshua Reynolds' Portrait of Omai. The painting was eventually sold for a record £10.3m to a British art dealer.

But even more galling had been the Tate's failure to raise the funds to buy Georges Braque's Atelier V, which had been hanging on its own walls for four years on loan and which it had been offered at a knock-down price by its Swiss owner. The painting was finally sold to the New York Museum of Modern Art for $6m (£4m).

Now, most alarmingly of all, Sir Nicholas has admitted that the Tate might no longer be able to fulfill its remit of "promoting the understanding of British art".

He said that the most recent Hockney one could find on the walls of the Tate was dated 1977. The most recent Howard Hodgkin was from the mid-1980s, the most recent Bridget Riley was early 1990s, and the latest Frank Auerbach was from the mid-1990s.

And to add to Sir Nicholas's concerns, the only other figure in the contemporary art world with comparable power and influence, the collector Charles Saatchi, is to open a modern art gallery in the former County Hall on the south bank of the Thames. It will compete with Tate Modern just along the river and could yet upstage it.

The prime cause of the Tate's descent into the red is, according to chairman of the trustees, David Verey, the reluctance of big companies to sponsor and support exhibitions following the downturn in the financial services sector. Mr Verey said: "Half of our income comes from private sources. That leaves us vulnerable to economic downturns. We will need to increase the real value of our grant in aid if the Tate's potential is to be fulfilled. Looking ahead we are forecasting a deficit for 2003-04 of £1.5m. That is a significant deficit for an institution like this."

However, as the Tate is forbidden by government to run a deficit, the £1.5m will have to be found from cuts elsewhere.

Sir Nicholas said: "There is an increasing reluctance on the part of sponsors to part with large sums. Therefore we have had to find money elsewhere; we have built up our corporate membership. But there are limits to what one can do.

"With acquisitions, almost on a daily basis we are offered works which we cannot even begin to contemplate. The public expects major British artists to be represented properly in the Tate collection," he said. "We are unable to do that because of the lack of money."

"But we don't see any sign that the government recognises the importance of acquisitions for our future collections," he added. "It means that Tate Britain can't do its job in the world, which is to promote the understanding of British art.

"The limitation on funding is acute and inhibits our activity in every possible way. The money available for acquisitions (£2m) is £0.2m smaller than in 1982. In the last two years we have not been able to acquire a single major early 20th-century British work."

Tate insiders are also acutely aware that the high visitor figures owed a lot to two hugely popular exhibitions, Matisse/Picasso at Tate Modern, which was visited by 500,000 people, and the Lucian Freud retrospective at Tate Britain, which attracted nearly 200,000. Overall, visitor figures at the two institutions over the last year were 3.5 million for Tate Modern and one million for Tate Britain.

Similar blockbusters are going to be needed every year if visitor numbers are not to fall sharply and further erode the gloss on the Tate brand. But no such blockbuster is apparent from the two galleries' exhibition plans for the next year, announced yesterday.

The biggest is likely to be a Bridget Riley retrospective at Tate Britain, while the work of the German 20th-century expressionist Max Beckmann is the highlight of Tate Modern in 2003.

One senior art world figure said: "They knew when they took on Tate Modern that they would ruin into trouble on running costs, which are enormous. The government has already bailed them out once. They relied very heavily on Matisse/Picasso and frankly Max Beckmann is not going to do it for them."

David Barrie, director of the National Art Collections Fund, an independent charity which has offered the Tate £1m to help buy pictures over the last two years, said: "It looks very bleak for the future of national collecting if the Tate, the big success story of the last decade, is struggling to fulfill its obligations."

The Tate has already had a £6m injection of funds to its grant to help run Tate Modern. However, Tate Modern and the expanded Tate Britain have added £17m to the Tate's annual running costs, which now stand at more than £55m. Trading profit from the restaurants, shops and publishing would have to rise from £1.5m in 1999-2000 to almost £5m in 2003-4 if the sums are to balance, while ticket sales, sponsorships and other income must increase from £6.4m in 1999-2000 to almost £13m in 2003-4.

Sandy Nairne, the Tate's director of national programmes, has told the trade magazine Museums Journal that the institution "was operating at an unacceptable level of risk".